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Solving the Ups and Downs of Personal Budget Enemy #1: Variance

You’re ahead of the game, you have a well thought out budget set and you’re doing a great job of tracking your expenses and BAM! Some unexpected charge nails you out of the blue! You do what you can but it ends up on your credit card and it impacts your spending for the next few months. We have all been there, in fact that can turn in to a spiral for some. How do you deal with these unexpected changes in your spending month to month?

Here are the 3 best ways to prepare for budget variance ups and downs:

1. Build Seasonal Expenditures in to Your Budget
Most people set the amount they budget for each of their budget categories as low as they can. They figure they can hit it and they want to try to be aggressive. They use their lowest month’s spend amount as their goal rather than looking at their average spend when they set it. If you have a good history in Mint or Yodlee, the average spend can be a great guide as to how much you really spend. Also, just looking back at the way you spend can help you make a realistic budget. Make sure that you build in things like more outdoor activities or higher gas costs in the summer.

2. Level Out Your Bills
Some of your bills can spike on you in a given month, causing the scenario described at the beginning of this post to happen. Avoid this by setting up payment plans where you can. A classic example of this is car, home and fire insurance (for more on insurance, check out our post 3 Ways to Save Money on Insurance and a Myth Busted). Many companies charge you for 6 months at a time in one month, causing a big spike in spending. A great way to solve this is to set up a payment plan that charges the same amount each month for all of your policies, it may cost a dollar or a bit more a month in fees but, it’s totally worth it when you consider the interest you might have to pay if you have to put big 6 month bills on your credit card.

3. Track Budget Category Spend Yearly, not just Monthly
When most people budget, they track their costs monthly. At the end of the month, if they spend less in a few categories they pat themselves on the back and go spend the money they didn’t spend for those categories. Unfortunately, the next month rolls along and the pent up demand for the goods in that category makes you go over your goal in that category and you now have a credit card balance or you have to cut back on other categories. This can be solved! Treat each category like a separate bank account. My grandpa told me him and my grandma used to have separate envelopes with budget categories like “Gas” and “Groceries” written on them. They would put their budgeted amount of cash in each month and then let anything extra each month stay in the envelope for when they needed it later. You can do the same on paper or with the carryover budgeting available in Mint. Give it a try, then you can see your budget status year to date, not just for any given month!

How do you control budget variance? Add your suggestions in the comments!

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  1. Not to get specific in the post but, the State Farm payment plan is a great way to remove variance from your budget in the insurance area. Not to mention you can set up automatic withdrawals and save yourself the bill paying headache as well.

  2. Tracking the budget monthly and annually is a good practice to trace up the expense for the whole although I must say it is kind of challenging.

  3. I own a small business where my income varies wildly, which makes it difficult to prepare a budget that takes income figures into account. But that doesn’t mean I cannot track my expenses and identify money bleeds. Quicken and Quickbooks (and other personal finance software) offers excellent tools that allow you to take a look at your expenditures from all directions. If you set up your accounts properly, you can run detailed reports that show you exactly where your money goes. For example, I can tell you exactly how much of my money goes to dining out vs. food purchased for the household. But setting up those account categories properly is the key.